We Think Comet Holding (VTX:COTN) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Comet Holding AG (VTX:COTN) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Comet Holding

What Is Comet Holding's Debt?

As you can see below, Comet Holding had CHF59.6m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has CHF115.5m in cash to offset that, meaning it has CHF56.0m net cash.

A Look At Comet Holding's Liabilities

We can see from the most recent balance sheet that Comet Holding had liabilities of CHF126.0m falling due within a year, and liabilities of CHF89.4m due beyond that. Offsetting these obligations, it had cash of CHF115.5m as well as receivables valued at CHF81.9m due within 12 months. So its liabilities total CHF18.0m more than the combination of its cash and short-term receivables.

Having regard to Comet Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CHF1.17b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Comet Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Comet Holding grew its EBIT by 138% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Comet Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Comet Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Comet Holding recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Comet Holding has CHF56.0m in net cash. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in CHF59m. So we don't think Comet Holding's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Comet Holding has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.